The Connecticut Hedge Fund Association Inc. is planning a seminar for late January titled “Financial Risks and Opportunities of Climate Change for the Connecticut Hedge Fund Industry.”
That might refer to the risks inherent in a change in sector climate.
One in five hedge funds will “wither away” by 2012, a new report predicts, despite an ever increasing appetite by asset managers to invest in the sector”™s complex and risky instruments.
The analysis by the Putnam Lovell subsidiary of New York City-based Jefferies & Co. provides a sour close to a year in which hedge funds once more demonstrated their ability to outperform more traditional investments ”“ though adding a few high-profile failures to the industry resume.
Those included UBS AG, Bear Stearns and other companies shutting down hedge funds that traded in mortgage-related securities; Greenwich-based Tudor Investment Corp. seeing its ballyhooed Raptor fund decline a reported 8.5 percent; and continued litigation from the 2006 collapse of Greenwich-based Amaranth Advisors L.L.C., which prompted calls for more industry oversight by U.S. Sen. Christopher Dodd and state Attorney General Richard Blumenthal.
Still, preliminary results from a locally managed index that tracks hedge funds indicated funds fell 1.6 percent in November, but are still up 10.5 percent for the year. The Greenwich Global Hedge Fund Index has outpaced equities both for the month and year, according to publisher Greenwich Alternative Investments, which is still collecting November data from some funds in the index.
In a twist on Fairfield County”™s “Gold Coast” label, in March Connecticut Department of Labor economist Lincoln Dyer dubbed the region the “Alchemy Coast” for its seemingly miraculous surge in financial services employment and pay. The county employs more than 16,000 people in the financial sector, with an average annual paycheck of $360,000.
Weaned on the investment needs of big pension funds and tested in their adolescence by the bear market of the early decade, asset managers now face their “true adulthood” ruled by turbulent markets, onerous client demands, fierce competition and shifting sources of revenue, according to Putnam Lovell analysts.
Among other challenges, the company adds, asset management funds now face:
Ӣ the waning influence of retirement-linked products;
Ӣ globalization and the rise of the Asian market;
”¢ increased demand for “outcome-oriented” portfolios;
Ӣ convergence of traditional and alternative products; and
Ӣ expanded use of performance-based fees.
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Ever more plentiful sources of “cheap beta,” in the words of Putnam Lovell, will provide new competition for hedge funds marketing such indexed investments. The term beta refers to the sensitivity of an investment linked to a market index or benchmark. The term alpha refers to the more traditional metric of how well a fund performs above the rate of return of a given market, such as the S&P 500.
Fairfield County ”“ and the world ”“ got a painful reminder of the concept of beta last summer following the $6 billion collapse of Amaranth Advisors, which doomed itself via bad bets linked to the spread of natural gas prices.
As it winds down its business, the company is now fighting an attempt by the Federal Energy Regulatory Commission to levy $290 million in fines against it and two traders accused of manipulating natural gas prices.
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